Netflix's Lack of Hardware Could Come Back to Haunt It

In 2011, Amazon.com (NASDAQ: AMZN) did something radical: It released a tablet. The Kindle Fire wasn't the retailer's first piece of hardware, but it was its most advanced -- until then, Amazon had focused on shipping goods and selling books.

It was the right move. With iTunes revenue exploding, it's become abundantly clear that the platform holder is at a huge advantage when it comes to digital good sales. To stay relevant in an increasingly digital world, Amazon had to offer a competing platform.

Eventually, Netflix (NASDAQ: NFLX) might be forced to do the same or suffer the consequences of competing with set-top box makers that are increasingly becoming competitors -- not just Amazon but also Microsoft (NASDAQ: MSFT) and Sony (NYSE: SNE) .

Reed Hastings departs from MicrosoftIn October 2012, Netflix CEO Reed Hastings resigned his spot on Microsoft's board. At the time, there was widespread speculation that Microsoft would acquire Netflix. Obviously, that never happened; instead, Microsoft built a competitor.

Microsoft is currently working on six original series, and has a dozen other shows in the pipeline. Microsoft's original content will be added to Xbox Live -- the annual subscription service that owners of its Xbox video game console purchase to access online multiplayer. While Xbox Live will likely remain a video game service, Microsoft is probably hoping that the exclusive content will prove to be a selling point -- shoppers looking for a video game console might choose the one that also offers high-quality original programming in addition to the latest games.

It could also hurt Netflix. While Microsoft's Xbox will still offer the Netflix app, and Netflix will still have its own original programming like House of Cards and Orange Is the New Black, Xbox Live subscribers could simply decide to cancel. There are only so many hours in the day, and if they're getting enough exclusive content from the Xbox Live subscription that they're already paying for, they may have no reason to keep their Netflix subscription.

Sony planning entertainment pushLike Microsoft, Sony is also planning to bolster its video game consoles with exclusive content. Less is known about Sony's ambitions, but according to The Wall Street Journal, Sony has several shows in production, including an hour-long drama series called Powers.

There's no guarantee that Sony will succeed. It's worth remembering that Sony is much more than an electronics firm -- it also has a massive entertainment division. In fact, Sony has created some of the most highly regarded TV shows of all time, including the hit series Breaking Bad. In addition to original content, Sony is also said to be working on an alternative to traditional paid TV. Sony's service would compete with cable, but be delivered over the Internet.

As with Microsoft's Sony's service won't replace Netflix, but it will prove to be more competition for the eyes of viewers. Bundled with PlayStation Plus, Sony's competitor to Microsoft's Xbox Live, it could encourage Netflix subscribers to ditch the service.

The Fire TV favors Prime at Netflix's expenseThen there's the Fire TV, Amazon's latest piece of hardware. With an extensive catalog of streaming content and its own original shows already available to watch, Amazon's Prime Instant Video is Netflix's biggest competitor.

Amazon didn't exclude Netflix from the FireTV, but it did give it second-class status. The Fire TV's voice search -- its signature feature -- doesn't work with Netflix content. Some owners of the Fire TV will no doubt pay for both services (like myself), but those on a strict budget, choosing between one or the other, will likely choose Amazon Prime.

The set-top box trend remains in its infancyTo be clear, this is a longer-term trend and not something that's likely to weigh on Netflix anytime in the immediate future. In fact, the set-top box industry as a whole remains in its infancy -- with relatively few Americans actually owning one.

But Netflix's management is ambitious, and the company hopes to have 90 million domestic subscribers within the next decade. In order to get there, it will rely on the companies building the Internet-connected set-top boxes. That puts it in a tricky position, as many of them -- Amazon, Microsoft, and Sony -- own, or are working on, Netflix competitors.

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